UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission file number 0-10777 CPB INC. (Exact name of registrant as specified in its charter) Hawaii 99-0212597 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 South King Street, Honolulu, Hawaii 96813 (Address of principal executive offices) (Zip Code) (808)544-0500 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, No Par Value; Outstanding at November 11, 1998: 9,972,796 shares
PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements listed below are filed as a part hereof. Page Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 F-1 Consolidated Statements of Income and Comprehensive Income - Three and nine months ended September 30, 1998 and 1997 F-3 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview CPB Inc. (the "Company") posted third quarter 1998 net income of $3.890 million, increasing by 1.8% over the $3.823 million earned in the third quarter of 1997. Net income for the first nine months of 1998 was $11.293 million, increasing by 1.8% over the $11.094 million earned in the same period in 1997. The increase in net income was mainly due to a $4.5 million gain on the sale of credit card loans included in other income in the third quarter of 1998, offset by increases in the provision for loan losses and other operating expenses. As of September 30, 1998, total assets of $1.52 billion increased by $20.4 million or 1.4%, net loans of $1.04 billion increased by $19.2 million or 1.9%, and total deposits of $1.19 billion decreased by $2.0 million or 0.2% compared with year-end 1997. On October 8, 1997, the Company's board of directors (the "Board") approved a two- for-one stock split effective November 14, 1997, on common stock outstanding as of October 20, 1997. All financial information presented in this report has been adjusted for the two-for-one stock split. The following table presents annualized return on average assets, annualized return on average stockholders' equity and earnings per share for the periods indicated. Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Annualized return on average assets 1.04% 1.06% 1.00% 1.04% 1
Annualized return on average stockholders' equity 10.16% 10.30% 9.72% 10.17% Basic earnings per share $0.38 $0.36 $1.08 $1.05 Diluted earnings per share $0.38 $0.36 $1.07 $1.05 Hawaii's economy has experienced little growth in the past seven years and shows little signs of significant improvement in the near future. Bankruptcy filings continued to rise during the first nine months of 1998, up 38% over the same period in 1997. Substantially all bankruptcy filings were Chapter 7 liquidations filed by individuals. Further increases in bankruptcies are anticipated based on Hawaii's high unemployment rate which has remained in the five- to seven-percent range for the past four years. The visitor industry, which has sustained the economy in recent years, has weakened in the nine months of 1998. Hotel occupancy rates in August 1998, normally a strong month for tourism, dropped to a 15-year low of 75.8%. The economic problems in Asia, particularly in Japan, have had a significant impact on the visitor industry, although tourism from Europe and the U.S. mainland has increased by more than 6% over last year. Bolstered by declining prices and attractive interest rates, local real estate market activity has improved slightly, with residential real estate sales volume on Oahu increasing by 24% in the first nine months of 1998 compared to the same period last year. Commercial real estate activity has also increased in recent months, although sales prices have dropped significantly, in some instances falling by 50-75% from the levels of recent years. Such economic conditions have had, and will likely continue to have, an adverse effect on our Company's future performance. Indicative of this economic environment, Central Pacific Bank (the "Bank"), a wholly-owned subsidiary of the Company, has experienced an increase in real estate and consumer loan losses as further discussed in "Provision for Loan Losses." While the Hawaii economy is expected to grow modestly in the near future, the trends in bankruptcy and foreclosure filings, employment, tourism and the real estate market could affect loan demand, deposit growth, provision for loan losses, noninterest income and noninterest expense. Accordingly, the results of operations of the Company for the rest of 1998 and 1999 may be adversely impacted by a lack of improvement in the economic climate in Hawaii. The "Year 2000" problem remains a primary focus of the organization. In July 1998, the Bank converted its core computer processing systems to an AS/400-based integrated banking system, a major step in the Bank's Year 2000 compliance effort. The 2
Company is currently testing this and other mission-critical systems to determine whether these applications are capable of operating in the Year 2000 environment and expects to complete this phase of the Year 2000 project by the first quarter of 1999. Efforts are also being made to modify or replace other noncompliant software, systems and equipment by the first half of 1999. Programs have been implemented to educate our customers on the potential problems and to assess their compliance status to ensure minimal risk of business disruption and economic loss. Contingency plans, which include outsourcing alternatives, manual processing, suspension of non-critical functions and the securing of additional sources of short-term liquidity, are being reviewed to ensure that the Company is prepared to handle the most likely worst-case scenario, including the inability of customers, vendors and other third parties to adequately address the Year 2000 problem. Borrowers representing approximately 2% of loans outstanding have been assessed to have a high risk of noncompliance, and accordingly, programs have been implemented to work with these borrowers to improve their compliance efforts. Further, Year 2000 compliance has been incorporated into the underwriting standards for new loans and renewal requests, and a Year 2000 risk factor has been incorporated into the assessment of the adequacy of the allowance for loan losses. The Company has expended, and will continue to expend, substantial resources to address this issue on a timely basis. Equipment and software expenditures related to the acquisition and implementation of new and enhanced systems and equipment are being capitalized and amortized over their respective useful lives. Expenditures related to the Company's internal resources and Year 2000 remediation costs are being expensed as incurred. To date, equipment and software expenditures totaled approximately $3 million out of a projected $4 million. Future expenditures are not expected to have a material impact on the Company's results of operations; however, no assurance can be given at this time that all aspects of the Company's operations will be Year 2000- compliant nor that the Year 2000 problem will not have an adverse impact on the Company's future earnings. Results of Operations Net Interest Income A comparison of net interest income for the three and nine months ended September 30, 1998 and 1997 is set forth below on a taxable equivalent basis using an assumed income tax rate of 35%. Net interest income, when expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (Dollars in thousands) Interest income $28,418 $28,732 $85,098 $82,602 Interest expense 11,759 11,436 35,367 33,087 3
Net interest income $16,659 $17,296 $49,731 $49,515 Net interest margin 4.70% 5.07% 4.66% 4.89% Net interest income was adversely impacted by the reversal of interest income on loans placed on nonaccrual status during the first nine months of 1998. Such reversals totaled $155,000 for the third quarter and $762,000 for the first nine months of 1998. Further, during the third quarter of 1997, the Bank recognized $720,000 in interest income on the payoff of a nonaccrual loan. As a result, interest income decreased by $314,000 or 1.1% in the third quarter of 1998 compared to the same quarter in 1997. Despite the factors discussed above, interest income for the nine months ended September 30, 1998 increased by $2.5 million or 3.0% due to the higher level of earning assets held in 1998. Average interest earning assets of $1,417.6 million and $1,422.2 million for the third quarter and first nine months of 1998, respectively, increased by $53.1 million or 3.9% and $73.1 million or 5.4%, respectively, over the same periods in 1997, due primarily to an increase in investment securities. The yield on interest earning assets of 8.02% for the third quarter of 1998 decreased from 8.42%, and the yield of 7.98% for the first nine months of 1998 decreased from 8.16% compared to same periods in 1997. The impact of the 1998 interest reversals and 1997 nonaccrual interest recognition accounts for 0.25% and 0.14%, respectively, of the decline in yields. Interest and fees on loans decreased by $677,000 or 2.9% and $333,000 or 0.5% in the third quarter and first nine months of 1998, respectively. Interest and dividends on investment securities increased by $683,000 or 15.6% and $3.4 million or 28.7% due to an increase in average balances. Interest on deposits in other banks decreased by $364,000 and $965,000, respectively, due to a reduction in short-term investable funds held during the current year. Interest expense for the three and nine months ended September 30, 1998 increased by $323,000 or 2.8% and $2.3 million or 6.9%, respectively, as compared to the same periods in 1997, due to increases in average interest-bearing liabilities of $35.5 million or 3.1% and $62.9 million or 5.7%, respectively. The average rate on interest-bearing liabilities for the third quarter of 1998 decreased to 4.05% from 4.06% in 1997 due to a decrease in market interest rates, while the average rate for the first nine months of 1998 as compared to the same period in 1997 increased slightly to 4.03% from 3.98%. The resulting net interest income decreased by $637,000 or 3.7% for the third quarter of 1998, while net interest income for the first nine months of 1998 increased by $216,000 or 0.4%, compared to the same periods in 1997. Net interest margin of 4.70% and 4.66% for the three and nine months ended September 30, 1998, respectively, decreased from 5.07% and 4.89% in 1997. 4
Strong competition for both loans and deposits, particularly core deposits, and the increased reliance on higher-cost funds are expected to further compress interest margins in the future. Provision for Loan Losses Provision for loan losses is determined by Management's ongoing evaluation of the loan portfolio and assessment of the ability of the allowance for loan losses to cover inherent losses. The Company, considering current information and events regarding a borrower's ability to repay its obligations, treats a loan as impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, if the loan is considered to be collateral dependent, based on the fair value of the collateral. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. For smaller-balance homogeneous loans (primarily residential real estate and consumer loans), the allowance for loan losses is based upon Management's evaluation of the quality, character and risks inherent in the loan portfolio, current and projected economic conditions, and historical loan loss experience. The allowance is increased by provisions charged to operating expense and reduced by loan charge-offs, net of recoveries. The following table sets forth certain information with respect to the Company's allowance for loan losses as of the dates and for the periods indicated. Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (Dollars in thousands) Allowance for loan losses: Balance at beginning of period $19,168 $19,275 $19,164 $19,436 Provision for loan losses 3,300 1,250 5,400 2,750 Loan charge-offs: Commercial, financial and agricultural 573 450 946 1,064 Real estate: Mortgage-commercial 941 599 1,612 867 Mortgage-residential 813 167 1,069 367 Construction - - - - Consumer: Credit card and related plans 160 163 605 500 Other consumer 131 116 614 480 5
Other - 1 2 3 Total loan charge-offs $ 2,618 $ 1,496 $ 4,848 $ 3,281 Recoveries: Commercial, financial and agricultural $ 2 $ 21 $ 12 $ 30 Real estate: Mortgage-commercial 299 - 300 - Mortgage-residential 3 2 31 22 Construction - - - - Consumer: Credit card and related plans 17 18 70 68 Other consumer 26 33 67 78 Other - - 1 - Total recoveries 347 74 481 198 Net loan charge-offs 2,271 1,422 4,367 3,083 Balance at end of period $20,197 $19,103 $20,197 $19,103 Annualized ratio of net loan charge-offs to average loans 0.85% 0.54% 0.54% 0.39% The provision for loan losses of $3.3 million and $5.4 million for the third quarter and first nine months of 1998 increased by 164.0% and 96.4%, respectively, compared to the same periods in 1997, reflecting the higher level of loan losses recognized during 1998. Net loan charge-offs of $2.3 million and $4.4 million, when expressed as an annualized percentage of average total loans, were 0.85% and 0.54%, respectively. Loan charge- offs during the third quarter of 1998 included $940,000 on a commercial loan and a commercial mortgage loan to a hotel owner, $400,000 on a loan secured by vacant land on the island of Kauai, and $400,000 on a mortgage loan secured by commercial property on the island of Oahu. The allowance for loan losses expressed as a percentage of total loans was 1.90% at September 30, 1998, an increase over the 1.84% at December 31, 1997. Considering the reduction in total nonaccrual and delinquent loans during 1998, Management believes that the allowance for loan losses at September 30, 1998 was adequate to cover the credit risks inherent in the loan portfolio. However, continuation of current economic conditions in the state of Hawaii may adversely affect borrowers' ability to repay, collateral values and, consequently, the level of nonperforming loans and provision for loan losses. Nonperforming Assets The following table sets forth nonperforming assets, accruing loans delinquent for 90 days or more and restructured loans still accruing interest at the dates indicated. 6
September 30, December 31, September 30, 1998 1997 1997 (Dollars in thousands) Nonaccrual loans: Commercial, financial and agricultural $ 1,225 $ 1,312 $ 1,192 Real estate: Mortgage-commercial 9,604 13,979 8,394 Mortgage-residential 6,880 1,081 1,448 Construction - - - Consumer: Credit card and related plans - - - Other consumer - 41 81 Other - - - Total nonaccrual loans 17,709 16,413 11,115 Other real estate 1,155 3,677 3,865 Total nonperforming assets 18,864 20,090 14,980 Loans delinquent for 90 days or more: Commercial, financial and agricultural 494 1,302 1,248 Real estate: Mortgage-commercial 83 311 2,491 Mortgage-residential 4,075 10,112 5,795 Construction - - - Consumer: Credit card and related plans 106 168 94 Other consumer 203 340 414 Other - - - Total loans delinquent for 90 days or more 4,961 12,233 10,042 Restructured loans still accruing interest: Commercial, financial and agricultural - - 125 Real estate: Mortgage-commercial - 2,727 2,571 Mortgage-residential - - - Construction - - - Consumer: Credit card and related plans - - - Other consumer - - - Other - - - Total restructured loans still accruing interest - 2,727 2,696 7
Total nonperforming assets, loans delin- quent for 90 days or more and restructured loans still accruing interest $23,825 $35,050 $27,718 Total nonperforming assets as a percentage of loans and other real estate 1.78% 1.92% 1.43% Total nonperforming assets and loans delinquent for 90 days or more as a percentage of loans and other real estate 2.24% 3.09% 2.39% Total nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest as a percentage of loans and other real estate 2.24% 3.36% 2.65% Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $23.8 million at September 30, 1998, decreasing by $11.2 million or 32.0% from year-end 1997. Nonaccrual loans, loans delinquent for 90 days or more and restructured loans still accruing interest were comprised primarily of loans secured by commercial or residential real property in the state of Hawaii. Nonaccrual loans of $17.7 million included several large commercial and commercial mortgage loans. Loans to a hotel interest on the island of Oahu totaling $4.3 million were partially secured by a first mortgage on the hotel property. A $2.5 million loan, of which $2.1 million was repaid in October 1998, was secured by commercial real estate located on the island of Maui, and loans totaling $4.7 million to two borrowers were secured by various properties on the island of Oahu. Nonaccrual loans at September 30, 1998 also included a number of residential mortgages on properties located in various parts of the state. Other real estate of $1.2 million at September 30, 1998 consisted of a condominium unit in Honolulu and undeveloped land on the island of Kauai. Loans delinquent for 90 days or more and still accruing interest totaled $5.0 million at September 30, 1998, a decrease of $7.3 million or 59.4% from year-end 1997. Since December 31, 1997, $4.1 million have been transferred to nonaccrual status, and another $2.2 million in residential mortgages related to a condominium financing project were brought current. Impaired loans at September 30, 1998 totaled $16.7 million and included all nonaccrual loans greater than $500,000 and several commercial and 8
commercial mortgage loans. The allowance for loan losses allocated to impaired loans totaled $3.7 million at September 30, 1998. Management continues to closely monitor loan delinquencies and work with borrowers to resolve loan problems; however, a continuation of the current economic environment in the state of Hawaii may result in future increases in nonperforming assets, delinquencies, net loan charge-offs, provision for loan losses and noninterest expense. Other Operating Income Total other operating income of $7.3 million for the third quarter and $13.3 million for the first nine months of 1998 increased by $4.6 million or 167.0% and by $5.4 million or 67.7%, respectively, over the same periods in 1997. Service charges on deposits increased by $116,000 or 16.6% and by $309,000 or 15.8%, respectively, due primarily to a focus on the collection of commercial deposit account fees. Other service charges and fees increased by $99,000 or 6.4% and by $391,000 or 8.8%, respectively, due mainly to increases in credit card and merchant servicing fees. In September 1998, the Bank sold $18 million of credit card receivables resulting in a $4.5 million gain which is included in other income. The sale is expected to result in a reduction in future interest income and net operating income related to the credit card receivables. Other Operating Expense Total other operating expense of $13.6 million for the third quarter of 1998 and $38.8 million for the first nine months of 1998 increased by $1.2 million or 9.5% and by $2.6 million or 7.2%, respectively, over the same periods in 1997. Salaries and employee benefits increased by $481,000 and $846,000, respectively, due in part to an increase in overtime expense incurred in conjunction with the Bank's conversion of its computer processing system. Increases in computer software, education and training expenses, supplies and various other expenses were also incurred in connection with the system conversion and sale of the credit card portfolio. Write-downs of other real estate of $200,000 in the third quarter and $502,000 for the first nine months of 1998 also contributed to the increase in other operating expenses. Income Taxes The effective tax rate for the third quarter and first nine months of 1998 was 43.08% and 37.54%, respectively, compared with the previous year's rates of 37.95% and 38.73%, respectively. During the third quarter of 1998, the Bank recognized approximately $340,000 in income taxes related to second quarter earnings due to uncertainties as to the tax benefits of the Bank's captive real estate investment trust. The decrease in tax rates for the nine months ended September 30, 1998 resulted from an increase in tax-exempt investments and loans held during 1998. 9
Financial Condition Total assets at September 30, 1998 of $1.52 billion increased by $20.4 million or 1.4% over year-end 1997 due to a $19.2 million or 1.9% increase in net loans to $1.06 billion and a $38.8 million or 12.1% increase in investment securities. This asset growth was funded primarily through a $34.1 million reduction in interest-bearing deposits in other banks and a $24.9 million increase in short-term borrowings. Total deposits at September 30, 1998 of $1.19 billion decreased by $2.0 million or 0.2% from year-end 1997. Noninterest-bearing deposits of $168.7 million was virtually unchanged during that period, while interest-bearing deposits decreased by $2.2 million. Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at September 30, 1998 of $865.8 million decreased by $10.1 million or 1.2% during the first nine months of 1998, while time deposits of $100,000 and over of $325.4 million increased by $8.1 million or 2.6%. The decrease in core deposits reflected declines in savings account balances which were partially offset by increases in money market accounts. Local competition for deposits remains strong and will continue to challenge the Bank's ability to gather low-cost retail funds. Capital Resources Stockholders' equity of $149.6 million at September 30, 1998 decreased by $2.1 million or 1.4% from December 31, 1997, and stockholders' equity as a percentage of total assets decreased to 9.86% from 10.14% at year-end 1997. On September 14, 1998, the Board declared a third quarter cash dividend of $0.13 per share, bringing total dividends declared to $0.39 per share for the first nine months of 1998, an 8.3% increase over the dividend rate during the same period in 1997. Dividends declared in the first nine months of 1998 totaled $4.1 million compared with $3.8 million in the first nine months of 1997. On August 26, 1998, the Board adopted a Shareholder Rights Plan (the "Plan") which entitles holders of common stock to receive one right for each share of common stock outstanding as of September 16, 1998. The rights are exercisable only upon the occurrence of specific events and will expire on August 26, 2008. The Plan was designed to ensure that shareholders receive fair and equal treatment in the event of unsolicited or coercive attempts to acquire the Company. The Plan was also intended to guard against unfair tender offers and other abusive takeover tactics. Management knows of no planned or threatened offers to acquire the Company at this time; however, in the current mergers and acquisitions environment, the Plan was deemed a prudent step in protecting the value of shareholders' investments. 10
On April 21, 1998, the Board authorized a stock repurchase program to repurchase up to 5%, or approximately 530,000 shares, of the 10.6 million shares of the Company's common stock outstanding. On September 14, 1998, the Board approved the repurchase of an additional 5% of common stock outstanding. The stock repurchase program is being conducted in the open market and is dependent upon market conditions. Stock repurchases commenced during the third quarter of 1998, and the Company has repurchased approximately 655,000 shares to date at a weighted average price of $17.47. The stock repurchase program will result in a slight decrease in capital and capital ratios and a corresponding increase in equity-based performance measures in future periods. The Company's objective with respect to capital resources is to maintain a level of capital that will support sustained asset growth and anticipated credit risks. Furthermore, the Company seeks to ensure that regulatory guidelines and industry standards are met. Regulations on capital adequacy guidelines adopted by the Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation (the "FDIC") are as follows. An institution is required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% must consist of Tier I capital, essentially common stockholders' equity (before unrealized loss on investment securities) less intangible assets. The FRB and the FDIC have also adopted a minimum leverage ratio of Tier I capital to total assets of 3%. The leverage ratio requirement establishes the minimum level for banks that have a uniform composite ("CAMELS") rating of 1, and all other institutions and institutions experiencing or anticipating significant growth are expected to maintain capital levels at least 100 to 200 basis points above the minimum level. Furthermore, higher leverage and risk-based capital ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of the FDIC Improvement Act of 1991. The following table sets forth the capital requirements applicable to the Company and the Company's capital ratios as of the dates indicated. Required Actual Excess At September 30, 1998: Tier I risk-based capital ratio 4.00% 12.54% 8.54% Total risk-based capital ratio 8.00% 13.80% 5.80% Leverage capital ratio 4.00% 9.92% 5.92% At December 31, 1997: Tier I risk-based capital ratio 4.00% 12.45% 8.45% 11
Total risk-based capital ratio 8.00% 13.71% 5.71% Leverage capital ratio 4.00% 10.41% 6.41% In addition, FDIC-insured institutions such as the Bank must maintain leverage, Tier I and total risk-based capital ratios of at least 5%, 6% and 10%, respectively, to be considered "well capitalized" under the prompt corrective action provisions of the FDIC Improvement Act of 1991. The following table sets forth the capital requirements for the Bank to be considered "well capitalized" and the Bank's capital ratios as of the dates indicated. Required Actual Excess At September 30, 1998: Tier I risk-based capital ratio 6.00% 12.22% 6.22% Total risk-based capital ratio 10.00% 13.48% 3.48% Leverage capital ratio 5.00% 9.67% 4.67% At December 31, 1997: Tier I risk-based capital ratio 6.00% 11.63% 5.63% Total risk-based capital ratio 10.00% 12.88% 2.88% Leverage capital ratio 5.00% 9.72% 4.72% Asset/Liability Management and Liquidity The Company's asset/liability management policy and liquidity position are discussed in its 1997 Annual Report to Shareholders. No significant changes have occurred during the nine months ended September 30, 1998. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company discussed the nature and extent of market risk exposure in its 1997 Annual Report to Shareholders. No significant changes have occurred during the nine months ended September 30, 1998. PART II. OTHER INFORMATION Items 1 to 5. Items 1 to 5 are omitted pursuant to instructions to Part II. 12
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The Financial Data Schedule as of and for the nine months ended September 30, 1998, is filed as Exhibit 27 to this report on Form 10-Q. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the third quarter of 1998. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CPB INC. (Registrant) Date: November 12, 1998 /s/ Joichi Saito Joichi Saito Chairman of the Board and Chief Executive Officer Date: November 12, 1998 /s/ Neal Kanda Neal Kanda Vice President and Treasurer (Principal Financial and Accounting Officer) 14
CPB INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> September 30, December 31, (Dollars in thousands, except per share data) 1998 1997 <S> <C> <C> ASSETS Cash and due from banks $ 48,362 $ 50,695 Interest-bearing deposits in other banks 114 34,188 Investment securities: Held to maturity, at cost (fair value of $125,995 at September 30, 1998 and $153,494 at December 31, 1997) 122,258 152,688 Available for sale, at fair value 237,262 168,023 Total investment securities 359,520 320,711 Loans 1,061,283 1,041,023 Less allowance for loan losses 20,197 19,164 Net loans 1,041,086 1,021,859 Premises and equipment 26,871 26,676 Accrued interest receivable 9,620 9,404 Investment in unconsolidated subsidiaries 7,294 7,269 Due from customers on acceptances 90 59 Other real estate owned 1,155 3,677 Other assets 23,360 22,563 Total assets $1,517,472 $1,497,101 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing deposits $ 168,669 $ 168,505 Interest-bearing deposits 1,022,503 1,024,653 Total deposits 1,191,172 1,193,158 Short-term borrowings 31,188 6,248 Long-term debt 120,894 127,705 F-1
Bank acceptances outstanding 90 59 Other liabilities 24,480 18,189 Total liabilities 1,367,824 1,345,359 Stockholders' equity: Preferred stock, no par value, authorized 1,000,000 shares, none issued - - Common stock, no par value; authorized 50,000,000 shares; issued and outstanding 10,016,696 shares at September 30, 1998, and 10,579,184 shares at December 31, 1997 6,740 6,612 Surplus 45,848 45,848 Retained earnings 96,098 99,188 Unrealized gain on investment securities, net of taxes 962 94 Total stockholders' equity 149,648 151,742 Total liabilities and stockholders' equity $1,517,472 $1,497,101 Book value per share $14.94 $14.34 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-2
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended (Dollars in thousands, September 30, September 30, except per share data) 1998 1997 1998 1997 <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $22,894 $23,571 $68,107 $68,440 Interest and dividends on investment securities: Taxable interest 4,398 3,831 13,456 10,681 Tax-exempt interest 357 246 978 399 Dividends 317 312 942 863 Interest on deposits in other banks 170 534 819 1,784 Interest on Federal funds sold 1 3 3 3 Total interest income 28,137 28,497 84,305 82,170 Interest expense: Interest on deposits 9,774 9,572 29,088 27,596 Interest on short-term borrowings 51 80 445 215 Interest on long-term debt 1,934 1,784 5,834 5,276 Total interest expense 11,759 11,436 35,367 33,087 Net interest income 16,378 17,061 48,938 49,083 Provision for loan losses 3,300 1,250 5,400 2,750 Net interest income after provision for loan losses 13,078 15,811 43,538 46,333 Other operating income: Service charges on deposit accounts 814 698 2,270 1,961 Other service charges and fees 1,641 1,542 4,811 4,420 Trust income 170 121 470 310 F-3
Equity in earnings of unconsolidated subsidiaries 80 107 270 368 Fees on foreign exchange 135 169 445 556 Other 4,479 104 5,061 330 Total other operating income 7,319 2,741 13,327 7,945 Other operating expense: Salaries and employee benefits 6,896 6,415 20,024 19,178 Net occupancy 1,586 1,613 4,768 4,861 Equipment 730 666 2,155 1,993 Other 4,351 3,697 11,839 10,138 Total other operating expense 13,563 12,391 38,786 36,170 Income before income taxes 6,834 6,161 18,079 18,108 Income taxes 2,944 2,338 6,786 7,014 Net income $ 3,890 $ 3,823 $11,293 $11,094 Other comprehensive income, net of tax: Unrealized holding gains on securities 881 416 868 579 Comprehensive income $ 4,771 $ 4,239 $12,161 $11,673 Per common share: Net income - basic $ 0.38 $ 0.36 $ 1.08 $ 1.05 Net income - diluted 0.38 0.36 1.07 1.05 Cash dividends declared $ 0.13 $ 0.12 $ 0.39 $ 0.36 Weighted average shares outstanding (in thousands) 10,320 10,554 10,505 10,547 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-4
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (Dollars in thousands) 1998 1997 Cash flows from operating activities: Net income $11,293 $11,094 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,400 2,750 Provision for depreciation and amortization 2,240 2,041 Net amortization and accretion of investment securities 212 269 Federal Home Loan Bank stock dividends received (942) (863) Net (gain) loss on sale of loans (4,295) 43 Net change in loans held for sale (5,201) 3,800 Deferred income tax expense (1,472) 1,065 Equity in earnings of unconsolidated subsidiaries (270) (368) (Increase) decrease in accrued interest receivable, other real estate owned and other assets 2,777 (8,878) Increase in accrued interest payable and other liabilities 6,489 930 Net cash provided by operating activities 16,231 11,883 Cash flows from investing activities: Proceeds from maturities of and calls on investment securities held to maturity 55,648 30,993 Purchases of investment securities held to maturity (25,274) (66,505) Proceeds from maturities and calls on investment securities available for sale 21,360 37,358 Purchases of investment securities available for sale (88,367) (46,321) Net decrease in interest-bearing deposits in other banks 34,074 2,733 Net loan originations (15,630) (11,979) Proceeds from disposal of premises and equipment 44 3 Purchases of premises and equipment (2,479) (1,901) Distributions from unconsolidated subsidiaries 295 265 F-5
Investment in unconsolidated subsidiaries (50) (150) Net cash used in investing activities (20,379) (55,504) Cash flows from financing activities: Net increase (decrease) in deposits (1,986) 17,288 Proceeds from long-term debt 46,500 34,000 Repayments of long-term debt (53,311) (21,643) Net increase in short-term borrowings 24,940 1,073 Cash dividends paid (4,134) (3,797) Proceeds from sale of common stock 534 339 Repurchases of common stock (10,728) - Net cash provided by financing activities 1,815 27,260 Net decrease in cash and cash equivalents (2,333) (16,361) Cash and cash equivalents: At beginning of period 50,695 55,534 At end of period $48,362 $39,173 Supplemental disclosure of cash flow information: Cash paid during the period for interest $32,155 $32,497 Cash paid during the period for income taxes $ 1,350 $ 7,700 Supplemental disclosure of noncash investing and financing activities: Transfer of loans to other real estate $ 499 $ 3,209 See accompanying notes to consolidated financial statements. F-6
CPB INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 1997. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three and nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. 2. Comprehensive Income In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130, effective for fiscal years beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. Comprehensive income is defined as all changes in equity, including net income, except those resulting from investment by and distributions to owners. Components of other comprehensive income for the three and nine months ended September 30, 1998 and 1997 were comprised solely of unrealized holding gains (losses) on available-for-sale investment securities. There were no sales of investment securities during those periods. Income tax expense (benefit) allocated to components of other comprehensive income were $586,000 and $578,000 for the three and nine months ended September 30, 1998, respectively, and $277,000 and $385,000 for the three and nine months ended September 30, 1997, respectively. Accumulated other comprehensive income is presented below as of the dates indicated: September 30, (Dollars in thousands) 1998 1997 Balance at beginning of year $ 94 $(590) Current-period change 868 579 Balance at end of period $ 962 $ (11) 3. Accounting Pronouncements In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 F-7
is effective for fiscal years beginning after December 15, 1997, although it need not be applied to interim periods in the initial year of implementation. SFAS No. 131 establishes standards for the way public companies report selected quarterly information about business segments, including information on products and services, geographic areas and major customers, based on a management approach to reporting. Reclassification of financial statements for prior periods will be required for comparative purposes. As this statement relates solely to disclosure requirements, its implementation will not have an effect on the Company's consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," an amendment of SFAS No. 87, "Employers' Accounting for Pensions, No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132, effective for fiscal years beginning after December 15, 1997, standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets to facilitate financial analysis and eliminates certain disclosures that are no longer considered useful. As this statement relates solely to disclosure requirements, its implementation will not have a material impact on the Company's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is permitted only as of the beginning of a fiscal quarter. The application of SFAS No. 133 is not expected to have a material impact on the Company's consolidated financial statements. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," an amendment of SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 135, effective for the first fiscal quarter beginning after December 15, 1998, requires that after the securitization of mortgage loans held for sale, the resulting mortgage-backed securities or other retained interests be classified in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," based on the entity's ability and intent to sell or hold those investments. The implementation of SFAS No. 135 is not expected to have a material impact on the Company's consolidated financial statements. F-8